Fewer Stocks Means More Opportunity

Have you ever wanted to become a full-time trader? If you’re one of the many who aspire to do so, there’s a mountain of information to read through.

There are countless books available on trading. So much so that it would be impossible to get through most of them. In fact, it would be hard finding the time to read a fraction of them.

All these books and websites claim to offer something new. It might be about understanding financial statements, or on how to read price charts. The most common are on how to buy and sell — using entry triggers and stop-losses to close out positions.

No doubt, some of them are useful. However, some topics are so obscure that it’s hard to imagine ever using them. There’s little point in studying some fantastical strategy that only works a couple of times a year.

Trading is a process

The thing about trading is that you have to be able to repeat a process over and over. And because trading is one of the most competitive things you can do, you need to know your market.

The first thing you need to do is work out which market to trade. The temptation for new traders is to have a crack at everything. They scan every available market hoping for some megabucks payoff.

They read about a hot sector one day and throw their money into a few randomly-picked stocks. And the next day it will be something else.

However, you’re going to make it very hard for yourself trading gold one week and FX the next. Thousands of traders sit in front of their screens all day hunting out the next profitable trade. If you think you can pop into the market whenever it suits, these traders are going to take your money.

You can’t spread your net too wide. There are hundreds of thousands of stocks listed worldwide — how could you possibly keep a tab on all of them?

You are much better off picking a single market to concentrate on. And while it might sound obvious, it’s really important to pick a market that suits your personality. If you like to take your time and think about things, day­-trading the futures market is probably not for you.

Narrowing it down

One approach is to start at the top and work your way down. The first step might be the easiest — picking the country or market you want to trade.

You might decide that you want to trade shares on the ASX. However, there are over 2,000 stocks — that’s way too many to ever keep an eye on.

The next step is to eliminate stocks you won’t trade. Market cap and daily volume are two common yardsticks. If you only want to trade stocks with a market cap of $1 billion or more, you can cut over 1,800 stocks from your list straight away.

That leaves you with around 200 or so stocks. Yes, a lot more manageable than the starting point, but still a lot of stocks to cover.

For a technical trader who only relies on charts, they can work their way through a number like this pretty quickly. However, for someone who researches each stock individually, it’s a lot to cover. The time it takes to work through them all means they’re going to miss a lot of news.

Of course, if you have specialist knowledge in one sector, you’re going to start a long way ahead of other traders. But if you don’t have that, one way is to start with something as simple as the ASX 20.

Read the news and look at price charts of these stocks every day. You might soon find that you have an affinity with some of the stocks. If you understand the drivers of the major banking stocks, you might add the regional banks to your list.

Or you might love reading and researching about oil and gas companies. If Woodside Petroleum Ltd [ASX:WPL] takes your fancy, for example, you can soon add similar stocks to your list.

Find stocks you like and understand

The idea is that you focus on a sector or a finite list of stocks. These are stocks that you understand, getting to know how they tick. Choose the news you want to read (company research, ASX announcements) — not the news that’s put in front of you. Get rid of all the noise that distracts you from your task.

If there are only 20 stocks on your list — and nothing more — you’ll start to see trading opportunities that you might have missed before. And anyway, unless you have a lot of capital behind you, trading a higher number of stocks might prove impractical.

One thing that may surprise you is that some traders specialise in only a single stock, like Telstra Corporation Ltd [ASX:TLS] for example. This can be another way to get started. Pick one stock you know the best and trade nothing else.

Make your list today and start working your way through. Eliminate the stocks that don’t meet your criteria, and those you don’t understand. And be brutal with the list. Cull any stock that no longer fits your criteria.

All the other things matter. You need to know how to look at charts and read financial information. You’ll also want to know when to enter and exit a stock. But unless you apply these skills to a set number of stocks, you’ll find it hard to be successful.

Matt Hibbard

While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years.

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